Behavioural Design & Consumer Behaviour (Talk)
Why you should apply Behavioural Design (Video)
Consumer and employee behaviour (Bajaj Finance)
Last week we spoke at Bajaj Finance on applying behavioural science to improve sales conversions, new product adoption, product portfolio, choice architecture, pricing strategies, employee behaviour change, productivity, performance management systems, learning and team collaboration.
One of the questions asked during the Q&A was what’s the difference between data science and behavioural science and what’s the role of both in business. We answered the question with the example of Uber. To make sure you can hire an Uber within couple of minutes of booking one and to make sure the cab arrives at the exact location around the time promised, Uber must be applying incredible amount of data science – matching user’s data with driver’s data and of course so much more we don’t understand as behavioural scientists. When Uber would use surge-pricing too, they would apply data science to incentivise drivers to reduce customer’s waiting time. But it didn’t go down well with anyone. So Uber changed its tactic from surge-pricing (1.8x) to upfront-pricing (Rs. 167). With upfront-pricing customers no longer feel its unfair because they are informed about the exact fare at the time of booking prior to the trip, which is a certain fixed amount and that puts customers at ease, even though in peak times Uber indicates that fares are higher due to higher demand. On the other hand, surge-pricing (1.8x) pinched people a lot more. But now with upfront-pricing, Uber is still able to charge a surcharge, but without pinching people as much, thereby improving customer experience. Uber’s upfront-pricing is an example of Behavioural Design.
Be careful when offering your brand for free
When you give something free, people don’t value it. Even if your brand is being given free as a gift with the purchase of another brand, whether highly priced or not, it could backfire.
Behavioural scientist Priya Raghubir had participants view a duty-free catalog that featured liquor as the target product and a pearl bracelet as the bonus gift. One group was asked to evaluate the desirability and value of the pearl bracelet in the context of it being the gift, and another group was asked to evaluate the pearl bracelet by itself. She found that people were willing to pay around 35% less for the pearl bracelet when they saw it bundled with the target product as a gift, than when they saw it as a standalone product.
This happens because consumers might infer that the product’s manufacturer wouldn’t give away a valuable product for free. People may wonder what might be wrong with the gift or may assume that the gift is obsolete or out of style or isn’t selling or it may be plain junk.
One way of preventing such damage would be to inform consumers about the true value of the gift. So instead of a ‘Free backpack with the suitcase’, it should read ‘Free backpack worth Rs. 1990 with the suitcase’.
This has application for anyone looking to influence others. Says Robert Cialdini, Professor of Psychology and Marketing at Arizona State University, “by pointing out to a colleague that you were happy to work for two extra hours to help finish this important project, because you know how much it means to his/her prospects, you are valuing your time in your colleague’s eyes. Or you could use it to convince people that, in order to avoid having their opinion devalued, they should stop giving you free advice.”
Why we hate losing more than we love gaining
The tendency to be more sensitive to possible losses than to possible gains is one of the best-supported findings in behavioural science. Nobel laureate Daniel Kahneman and his colleague Amos Tversky were the first to test and document the notion of ‘loss aversion’ – the idea that we are more motivated to avoid losses than we are to acquire gains.
Loss aversion affects a lot of our decisions, in finance, negotiation, persuasion, etc. One consequence of loss aversion is that it makes inexperienced investors to prematurely sell stocks that have gained in value because they simply don’t want to lose what they’ve already gained. (We had also written about it in ‘Why we sell the wrong stocks’) Similarly, the desire to avoid any potential for a loss also makes investors to hold on to stocks that have lost value since the date of purchase. Because selling the stock would mean taking a loss on the investment, which most investors are reluctant to do, a decision that often precedes further stock price decline.
Another popular example of loss aversion is the debacle of New Coke. From 1981 to 1984, Coca-Cola company tested its new and old formulas in taste tests amongst two hundred thousand people across twenty-five cities. 55% of people preferred New Coke versus 45% who preferred the Old Coke. Though most of the tests were blind, in some of the tests people were told which was the New and Old Coke. Under those conditions, preference for New Coke increased by an additional 6%. Why did New Coke fail inspite of such extensive research?
Says Robert Cialdini, Professor of Psychology and Marketing at Arizona State University and advisor to Obama “During taste tests, it was New Coke that was unavailable to people for purchase, when they knew which sample was which. So they showed an especially strong preference for what they couldn’t purchase otherwise. People at the Coca-Cola company might have said, “Oh this means that when people know that they’re getting something new, their desire for it will shoot up.” But, in fact, what the 6% really meant was that when people know what it is they can’t buy, their desire for it will shoot up. Later when the company replaced Old Coke for New Coke, it was Old Coke that people couldn’t have, and it became the favorite.”
For people losing Old Coke was more valuable than gaining New Coke. What this means is that to make messages more persuasive they should be framed to avoid losses more than acquire gains. So a message like ‘Shop till you drop at 30% discount’ could be more persuasive if framed as, ‘Don’t miss the chance to shop at 30% discount’. The latter implies that the deal is scarce in some way (e.g. limited time) and that people could be losing the opportunity to get a good deal.
Sources: Daniel Kahneman and Nathan Novemsky – The Boundaries of Loss Aversion – Journal of Marketing Research 42:119-128 (2005)
Ziv Carmon and Dan Ariely – Focusing on the Forgone: How value can appear so different to buyers and sellers – Journal of Consumer Research (2000)
G.R. Shell – Bargaining for advantage (1999)
If you’re good at math, consider yourself blessed
I struggled all my studying years with MATH (Mental Abuse to Humans). I was so bad at math that I had even developed a method of memorizing patterns to solve problems, so that I could apply them in case a similar question came up in the exam paper. If you were and are good at math, I have very high regards for you, because most of the human race is simply bad at it.
Consider these two promotions. One is a flat ‘33% off’ on the MRP. The other is 33% more quantity of the product free. In short – ‘33% extra free’. Are both similar? Which one seems more attractive to you?
If both are similar in terms of a proposition to you, but you still prefer ‘33% extra free’, you’re in the majority. In a study, Akshay Rao, the General Mills Chair in Marketing at the University of Minnesota’s Carlson School of Management, asked undergraduate students to evaluate two deals on loose coffee beans — one with 33% more beans for free, the other at 33% off the price. All the participants chose ‘33% extra free’, inspite of ‘33% off’ being a quantitatively bigger and better offer favouring the customer. (33% off = 50% extra free)
The reason why we opt for ‘33% extra free’ is not just that we suck at math, but we are also infatuated with the idea of getting something for free. It seems as if the power of ‘free’ makes us worse at math.
Now, how you take advantage of this will depend on whether you are a consumer or a marketer.
